Optimal Contracts for Renewable Electricity

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Title: Optimal Contracts for Renewable Electricity
Authors: Parlane, SarahRyan, L. (Lisa B.)
Permanent link: http://hdl.handle.net/10197/11087
Date: Sep-2019
Online since: 2019-09-26T11:26:32Z
Abstract: Companies are increasingly choosing to procure their power from renewable energy sources, with their own set of potential challenges. In this paper we focus on contracts to procure electricity from renewable sources that are inherently unreliable (such as wind and solar). We determine the contracts that minimize the cost of procuring a given amount of renewable energy from two risk-averse generators. We contrast outcomes arising when investments are set in centralised and decentralised settings, with the absence of reliability addressed by either issuing orders in excess of what is needed or by investing in improved reliability. Our results suggest that future contracts may be geared towards a greater reliance on order inflation and lower investments in reliability as the cost of renewable energy keeps falling. The implications of these results for grid congestion and electricity spot market prices should be of interest to regulators and transmission system operators.
Type of material: Working Paper
Publisher: University College Dublin. School of Economics
Start page: 1
End page: 36
Series/Report no.: UCD Centre for Economic Research Working Paper Series; WP2019/20
Copyright (published version): 2019 the Authors
Keywords: Renewable electricity contractsPower purchase agreementsNewsvendor modelRisk aversionOrder inflationMoral hazard
Language: en
Status of Item: Not peer reviewed
Appears in Collections:Energy Institute Research Collection
Economics Working Papers & Policy Papers

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